[The data on cash returns in this post were updated in January of 2022.]

The most popular page in the four-year history of Mindfully Investing is this article about the historical returns of stocks and bonds.  Most of the interactions I’ve had (links, comments, emails, etc.) about that article have focused on the historical returns of stocks.  But Business Insider linked to my site recently for a reference to the historical returns for cash, and I’ve seen a surge in questions about cash as an asset class.  So, for today’s post, I thought I would dive deeper into the history of investment returns for cash.

What Is Cash?

Cash is one of the three major asset classes addressed at Mindfully Investing, the other two being stocks and bonds.  Beyond what’s in your wallet, cash is an asset that’s highly liquid (meaning you can convert it into spendable money easily) and pays relatively low rates of interest or other returns.  Cash includes bank accounts, savings accounts, money market accounts, certificates of deposit (CDs), and similar holdings offering low interest rates.

Cash is also sometimes called a “short-term” investment because bond and stock returns have almost always outperformed cash returns over longer periods.  Cash is also thought of as a “safe haven”, because, unlike stocks and bonds, the “price” of cash does not decline (or rise) over time, as long as everything is measured in the same currency.

Paper money stashed under your mattress is also cash, but it’s an inferior type of cash because your mattress will refuse to pay interest.  Given that the nominal historical return for mattress money is 0% per year, we can leave any further consideration of paper money stashes to the most insecure and pessimistic investors out there.  (“Nominal” means a return that is not adjusted for inflation, which I’ll come back to in a bit.)

Finding Return Histories for Cash

Summarizing the historical returns for cash is complicated because there are so many different cash vehicles, and some of them are relatively recent inventions.  For example, the idea of the CD has only been around since 1961.  Similarly, the nuanced varieties of bank and money market accounts have exploded over my investing lifetime.  So, it’s nearly impossible to find continuous long histories for many of today’s most common cash investments.

Consequently, most finance folks turn to a surrogate measure of cash returns that is actually a very short-term Treasury bond, called a Treasury bill.  So-called T-bills are a U.S. government debt obligation (a bond) with a maturity of one year or less.  Given their short-term nature, T-bills tend to have yields that are very similar to cash vehicles simultaneously available at any given moment in history.  T-bill returns mimic cash interest rates because few people will buy a 3-month T-bill knowing that they could obtain substantially better interest over the same three months from a savings account, and vice versa.

T-bill durations can be as short as one month, but as a cash return surrogate, the 3-month T-bill is probably the best choice.  That’s because most publically traded companies must issue financial reports once per quarter, and principle held longer than 3 months starts to resemble, at least to an accountant, other types of longer-term investments.  By the same logic, in most situations, accountants won’t park cash in three successive 1-month T-bills when they can get slightly more interest from a 3-month T-bill.¹

Historical Returns for Cash

Aswath Damodaran at the NYU Stern School of Business has gathered historical returns for the 3-month T-bill, which is the primary source for the historical cash returns discussed in today’s post.  Based on his data, the nominal average annualized return (also known as Compound Annual Growth Rate; CAGR) for cash from 1928 through 2021 was about 3.3%.

However, 3.3% is a long-term average, which means that over shorter periods the cash returns have drifted significantly away from that average.  This table shows some additional descriptive statistics for the nominal cash return dataset.

We can see that historical cash returns have ranged anywhere from close to zero to almost 9%.  But most of the time, as represented by the 50 percent of cases between the 25th and 75th percentiles, cash returns have ranged between about 1% and 5%.

You may be interested in determining annualized cash returns for specific historical periods.  Similar to my historical return calculators for stocks and bonds, this calculator provides annualized cash returns (both nominal and inflation-adjusted) between any two periods based on the Damodaran dataset.

What Is The Current Situation for Cash?

Currently, cash returns are low because interest rates are at historic lows.  I reviewed data from Bankrate.com to see what interest rates are currently available for short-term cash deposits.  Here are the highest annual interest rates I found for some common cash vehicles and a comparison to the current 3-month T-bill yield:

• Checking accounts – 0.10%
• Savings accounts – 0.55%
• Money market accounts – 0.55%
• One-year CDs – 0.75%
• Three-month T-bill yield – 0.17%

Ignoring checking accounts and T-bills for a moment, the current returns on cash are a bit under the 25th percentile of all historical data.  That is, cash returns have been historically higher than today’s cash returns about 75% of the time.

Interestingly, the yield on the 3-month T-bill is substantially lower than the interest rates for almost all these cash vehicles.  Based on the T-bill, cash returns are closer to the 5th percentile of historical data.  This shows why the 3-month T-bill rate is only an approximate surrogate for cash returns, and why a cash savings account is currently a much better short-term investment than T-bills.  But more importantly, it implies that today’s very low interest rate environment has disconnected the typical relationship between Treasury bonds/bills and cash.

Conclusions

As I’ve written many times at Mindfully Investing, cash is currently a better short-term, and even intermediate-term, investment than T-bills or bonds.  It’s easy to find online asset allocation calculators, rules of thumb, Robo-advisers, and human advisers that will give you the standard advice to hold a balance of stocks and bonds as the core of your investment portfolio.  But before you lock-in 5 to 10 years of miserable returns from Treasury bonds, you might want to consider whether cash could be a better short-term solution for that non-stock portion of your portfolio, at least for the next few years until interest rates rise again³.

1 – The yields on bonds and T-bills, as well as interest rates on cash deposits, are usually higher for longer-dated instruments.  However, around times of recession, these patterns can sometimes temporarily reverse.

2 – The arithmetic average of annual returns differs from annualized returns (CAGR) as discussed more here.

3 – I’m not predicting that interest rates and/or inflation will rise soon, but the Federal Reserve recently announced that three interest rate hikes in 2022 was on the table.